FX Update: A week to watch the USD and US-China

Risk sentiment has apparently received a boost from the late Sunday TV programme 60 minutes and its interview with Fed Chair Jay Powell on the outlook for the US economy and the Fed’s willingness to continue providing the necessary support. While the Fed Chair by no means donned rose-tinted goggles on the shape of the recovery, his reassurance that the Fed is far from out of ammunition and other comments provided a tone that was perhaps seen by many as offsetting some of the negative reaction to last Wednesday’s speech. Powell again pushed against the idea of negative policy rates.

The FX reaction to Powell’s speech was less detectable, with the US dollar only a notch or two lower in places and notably stronger against the Chinese renminbi overnight. The recent drumbeat of developments and the latest US move against Huawei have us concerned that situation could continue to escalate from here. On that note, the USDCNY rate remains the most important exchange rate for the outlook here on any further signs of a worsening geopolitical strains or even threats that the US-China trade deal faces a collapse. This morning, the rate was 7.1150 and thus above the highest daily close for this year, with any approach to 7.20 likely to signal broadening unease and a large break above trig. In FX, the fallout from lower CNY would be likely felt most acutely in EM and with the G10 by AUD and NZD.

Not much on the calendar today as we await headlines from the US and China this week, but we also watch for an ugly rise in tensions on the US domestic political front as the Democrats massive $3 trillion stimulus passed by the House will not pass the Republican-majority Senate or get Trump’s signature. US Treasury Secretary Mnuchin and Fed Chair Powell are both set to testify before the US Senate Banking committee tomorrow on the CARES act, the rollout of which has not been without considerable controversy.

Chart: EURUSD still heavy
The EURUSD exchange rate is not necessarily the most sensitive to the overall USD direction, but is a key piece in establishing the broader USD levels and particularly whether the pressure on the USDCNY rate is waxing or waning. The 1.0800 level has proven very sticky of late, with several forays below quickly gathered up. A failure and daily close through 1.0750 could set the broader FX market on edge from here and add to the attention on the USDCNY rate to boot.